Barbados has suffered another credit downgrade.
This time by Standard & Poor’s (S&P) which has lowered the island’s long-term foreign currency rating to “selective default” following the June 1 announcement by Prime Minister Mia Mottley that her week-old administration was suspending foreign debt service payments and seeking to make interest payments on its domestic debt while negotiating a restructuring agreement with domestic creditors.
As a result, Barbados failed on June 5 to make an interest payment due on its 6.625% notes due by 2035, and “we do not expect such a payment to be made”, S&P said.
“We also believe that Barbados will fail to pay its other outstanding external debt obligations as they come due while it negotiates a restructuring agreement with external creditors,” the United States-based ratings agency said in announcing its decision to reduce the island’s long-term foreign currency sovereign credit rating to selective default down from ‘CCC+’ and its long-term local currency rating to ‘CC’ from ‘CCC’.
“We are also lowering our long-term foreign currency issue rating on Barbados’ 2035 notes to ‘D’ from ‘CCC+’,” S&P said while announcing that “another four long-term foreign currency issue ratings and the local currency sovereign issuer credit and issue ratings are on CreditWatch negative, reflecting our view that the sovereign could miss payments on its foreign and local currency debt within the next three months”.
Mottley’s decision to suspend Barbados’ foreign commercial debt payments had earlier triggered a downgrade by the regional ratings agency CariCRIS, which dropped Barbados’ rating to ‘CariC’ on both its foreign currency and local currency rating.
In a further blow to the island’s credit worthiness, S&P is warning that it could lower the local currency sovereign issuer credit rating to selective default if Barbados fails to make debt service payments on its local currency debt or executes an exchange with bondholders.
“Our ratings on Barbados reflect its selective default on its external debt obligations and our view that a default on its local currency debt obligations is a virtual certainty,” the international ratings agency said, explaining that even though the Mottley Government has said it intends to meet its interest payment obligations on its domestic debt, “we would likely treat its request to roll over principal on this debt as a default given the nature of the request amid stressed financing conditions and limited options for bondholders.
“The Government’s next significant domestic bond maturity is its Barbados dollar (BB$) 100 million 4.375% Treasury notes due on June 30, 2018. Prior to this development, Barbados’ history of wider fiscal deficits and low growth since the global financial crisis has resulted in a significant increase in the Government’s debt burden,” S&P noted.
It also pointed out that net general Government debt reached nearly 95 per cent of GDP in 2017, one of the highest debt levels among Latin American and Caribbean sovereigns.
At the same time, it highlighted the fact that Government has not issued in the global capital markets since 2013 and that there has been a limited appetite for Government paper in the local market in recent years which has led to reliance on financing from public-sector entities, including the Central Bank.
Also, amid high current account deficits and limited external inflows, external liquidity has been weakening with reserves reportedly reaching US$220 million as of May 31, 2018, increasing the vulnerability of Barbados’ currency peg and heightening the risk of a balance-of-payments crisis.
S&P also noted that Government has been forced to turn to the International Monetary Fund for balance of payments support with a team from the Washington-based financial institution currently on island for talks with key stakeholders.
But though IMF financial support should strengthen the country’s external position, S&P said it was concerned that Barbados’ usable reserves have been negative since 2013, and the position continues to deteriorate, in part because of the Central Bank’s historical deficit financing, which has expanded the monetary base in the past.
It also pointed out that even in the face of these challenges, the Mottley Government, which came to power on May 24, has said that it intends to present a balanced budget by next year and is also sticking to election promises – including the elimination of the National Social Responsibility Levy, the resolution of the country’s sewage crisis, an increase in pensions, delivery of free university education, and improved transportation and trash collection – even though a comprehensive restructuring plan was yet to be formulated.